Mark,
Open interest on options is tabulated at the end of each trading day. The calculation is straightforward, and is probably done by the computer every time you submit a request using the latest OI data, which means as of the prior day.
The conventional wisdom is that the MaxPain point will attract the price as expiration approaches, "all else being equal". Anytime the MaxPain point is far away from the price, it's a pretty safe bet all else is not equal. What does seem to happen though is that price gravitates toward a strike price on expiration Friday, and it moves toward the MaxPain level. I have thought at times that it might work better to simply count open interest rather than pricing the open contracts. Find the strike at which the largest number of contracts expire worthless, and go with that that. That fits with Bernie Shaeffer's support and resistance theory. The value calculation and the OI count are generally in agreement, but the OI distribution tends to be relatively "normal" (as in statistically normal) in most cases. A big OI spike at one strike could shift the point of maximum number of contracts expiring worthless away from the minimum dollar value point, and could be more significant. It's an interesting indicator to follow, but I would never bet the farm on it.
A case in point: I checked MaxPain for VRTY yesterday and got 17.5 for August. With a P/E of in the mid teens, the dip well below 15 sure looked like a good buy, and I did buy some. Then this morning I got hammered by the earnings warning. There's a lot of ITM puts out there now, but I don't think that will have too big an effect on the price by next Friday. Could be interesting to watch though. The dollar difference of the options between closing at 10 and closing at 15 is almost $4M. That's nothing to sneeze at, but not big compared to the $170M (50% of market cap to go from 10 to 15) change in value of the shares to move the stock that far.
Dan |
